The Guardian reports this week on what has been happening to top salaries and bonuses in the City of London is only the latest example of a long term trend in income and wealth distribution. It is just one example of profound changes in the UK's social structure and its pattern of rewards.

It poses a real challenge to traditional social democratic ideas about how to respond to inequality. How does any social democratic government restrain the explosive widening of the income gap in modern economies driven by globally set incomes? The last 10 years have been unusually benign, unprecedented growth and falling unemployment. If we cannot redistribute more effectively in those circumstances when will we be able to?

In a recent study, British Social Policy: 1945 to the Present, I traced the impact the state has had in attempting to mitigate inequality since before the second world war.

It would be a mistake to draw the conclusion that in some way this approach has completely failed. The coming of the postwar welfare state sharply reduced the scale of inequality compared to the 1930s. Before the second world war government activity, through taxes and benefits, reduced the scale of inequality by about a quarter. The new 1948 welfare state reduced pre-tax and benefit inequality by over 40%. Since then it has continued to reduce inequality but only by about the same proportion. That, despite all the innovations piled steadily one on another, especially in the past 10 years. Why?

The biggest postwar reductions in inequality came about because of full employment and the high rewards scarce labour could earn in a still largely manual workforce. Most people were clustered around a wide middle band of income. It was considered indecent and unwise to reward yourself as a boss with extravagant incomes and lifestyle. Now the structure of incomes at the very top is running away with no restraints, moral or practical. The tax and benefit system is having to work harder and harder just to contain this runaway market inequality.

In absolute terms the present tax and benefit system is redistributing income to twice the extent it was in Clem Attlee and Nye Bevan's time. The reduction in the Gini coefficient, which measures inequality that government achieves by its taxes and benefits policy, is now twice what it was in 1949. But the Gini coefficient of pre-intervention market incomes is also twice what it was in 1949.

Brown's attempts to include more of the excluded population in the work force and reduce poverty from the bottom is surely right. The 1940s showed that. But it will never reduce the widening gap at the top.

Perhaps it does not matter what the top 1% earn. Perhaps very high rewards are beneficial, or at least inevitable, in a globally competitive economy. This is what makes the UK the vibrant place the go getters want to be. But perhaps, in the long run, it does matter for the stability and decency of society. If it does we had better work out what to do about it more effectively than we are now.